Maintaining an optimal level of inventory always challenges warehouse managers. On one hand, high inventory levels lead to high holding, hidden, and opportunity costs. On the other hand, low inventory levels increase the risk of business loss. Therefore, managers must strike a balance to avoid both extremes. By maintaining the right level of inventory, organizations can control costs while ensuring a satisfactory service level.
Inventory auditing allows the warehouse management team to evaluate inventory policies, check their implementation, review inventory levels, and verify the accuracy of records against the actual stock. The team may carry out the audit with internal staff or rely on a third-party organization. While internal auditing requires less cost, external auditing often delivers greater accuracy and reliability.
The objectives of the inventory auditing are as follows.
This method classifies items according to their annual dollar volume. Specifically, items fall into three categories: A, B, and C. Category A covers items that account for 70 to 80 percent of the annual volume. Category B includes items ranging from 80 to 95 percent, while Category C represents the remaining 95 to 100 percent. Since Category A items involve higher costs, managers pay closer attention to them.
During this method, warehouse operations stop completely, and the team performs a physical count to determine the actual inventory level. In addition, all incoming and outgoing shipments remain suspended until the audit is complete.
Inventory and warehouse management also involve overheads such as rent, utilities, and insurance. Therefore, audits also help determine the overhead expenses linked to inventory and provide a clearer view of total costs.
Auditors also review transportation and shipping costs to identify opportunities for cost optimization. These audits may cover the movement of goods between warehouses, as well as shipments from manufacturing facilities to warehouses or other related locations.
Warehouse teams physically count goods or items to verify inventory levels. This process can follow either a perpetual or a periodic system. In a perpetual system, staff update counts whenever a unit enters or leaves the store. In contrast, a periodic system records inventory after specific time intervals.
Inventory audit is important as this helps:
Inventory auditing also helps organizations in budgeting. High or low-level inventory orders because of inaccuracy in inventory may cause over budgeting or under budgeting.
Following steps need to be followed for inventory auditing
Following are some of the key challenges in inventory auditing.
Modern technologies such as RFID and GPS now support inventory auditing. In addition, companies use QR codes within these technologies to store key details, including batch numbers, receiving dates, supplier names, manufacturing dates, and expiry dates. As a result, locating inventory becomes easier, and traceability improves significantly. Furthermore, the introduction of these technologies has reduced many challenges in inventory auditing. Consequently, the process is now simpler, faster, and less time-consuming. Moreover, modern technologies and software also help companies design more effective warehouse layouts and improve product placement, which further enhances efficiency.
Inventory auditing provides a systematic way to monitor and verify warehouse inventory against the records in the accounting system. Moreover, organizations can choose from different audit methods, and each method has its own pros and cons. The choice largely depends on organizational needs as well as system requirements. However, conducting an inventory audit often requires significant time and money, and it can also disrupt production and operational efficiency. On the other hand, the process offers clear benefits. For instance, it updates actual inventory levels, maintains accuracy, evaluates costs, and prepares future budgets. In addition, modern technologies now streamline and improve inventory auditing methods, making the process more efficient and reliable.
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